Bailouts Aggravate Financial Crisis

In the New York Times, economist Tyler Cowen of George Mason University argues that the $700 billion financial-system bailout is impeding an economic recovery. Because of the “ad hoc,” standardless way the money is being doled out, “the market doesn’t know what to expect and many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.”

Professor Cowen also notes that past bailouts helped spawn the current financial crisis. “The financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund.” “With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.”

Unfazed by logic and history, the Bush Administration is implementing an illegal, multibillion dollar auto bailout, while the incoming Obama Administration, not to be outdone, is preparing a trillion dollar “stimulus” package to complete the ruin of the nation’s finances.